Currency as Debt: A New Theory of Money
A Practical Application of the Concept of Virtual Wealth
Part 2 of 7
 

Expanding upon these concepts of exchanging wealth and circulating currencies, a common complaint is that currency borrowed into existence—at interest—does not include the funds necessary to repay the interest on that loan; therefore the initial debt requires a continuing increase in debt or the economy will collapse. This argument is based on the same previous two micro-static assumptions, and both assumptions are again false in the real macro-dynamic world.

True, there is a debt associated with currency borrowed into existence, but that debt obligation is placed upon the person who borrowed the currency. When that currency is spent into general circulation, the debt obligation does not transfer with the currency, the obligation remains with the person who borrowed the currency.

By providing valuable goods and services to the market, the borrower gradually earns enough currency from the general circulation to repay the original principal, as well as enough to pay the interest. Completing this transaction requires time, of course. Upon receiving those payments, the bank returns the loan principal to its place of origin (created out of thin air), but declares as bank profit that portion of the loan repayment which is called interest. This bank profit will be distributed among the bank’s depositors and investors, and used to pay the bank’s operating expenses, in every case eventually returning to general circulation.

At this point some people are asking, “But from where did the currency appear that was used to pay the interest portion of the loan?” The straightforward answer is from future labor. Consider the following example.

A farmer asks his banker for a loan. The banker provides a plow, a horse, and a sack of corn seed. The banker expects the farmer to return the plow, the horse, and a sack of corn seed. The price for borrowing those commodities (the interest to be paid) is some of the harvest. Under normal weather conditions with no natural or man-made disasters, the farmer raises a healthy crop of corn. The farmer returns to the banker the plow, the horse, a sack of seed, and some of his harvest. What does the farmer have left? His crop of corn, which he can eat, barter, trade, or sell on the market. The farmer converted some natural resources and his labor into property—corn. The farmer not only repaid the loan, he paid the interest and was even left with something extra of value. The farmer’s land and labor provided that value.

Future conversion of labor and resources pay the interest on bank loans.

Now expand that example to our previous observation that a currency circulates several times throughout an economic society. Borrowers in the system create valuable goods and services for the market. That is, they create wealth. That wealth is exchanged for other forms of wealth and the currency in circulation provides the means for such exchanges.

Any bank wishing to continue in business must make new loans to replace the loans that are repaid because the original principal is extinguished from circulation and profits are eventually disbursed into general circulation. The currency extinguished by the repayment of one loan will be replaced by currency created with a new loan. In a stable economy, these aggregate opposing transactions cancel one another, the volume of currency remains constant and commercial activity goes on forever.

The two original assumptions of the micro-static world fail in the real macro-dynamic world. However, both initial assumptions nonetheless contain some validity for seeds of concern.